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Special Bulletin
A Japanese Perspective on the International Energy Landscape (128)

April 26, 2013

Perspectives on World Economy, U.S. Energy Situation, and International Oil/Gas
Market Perspectives
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn April 25, I had an opportunity to discuss key points of the international energy situation
with energy experts, energy policy planners and energy industry people in a conference that theOxford Institute for Energy Studies sponsored in Vienna, Austria. Discussions covered a wide rangeof topics. Here, I would like to take up the points of interest to me about prospects for the world
economy, the U.S. energy situation, the international oil market and the international gas/LNGmarket.
As the conference took place in Europe with participants dominated by Europeans,speakers there presented rather pessimistic forecasts about the future world economic situation inview of the present European economic situation. Although the danger of “euro collapse” was once
perceived as a matter of serious concern, the current European situation seems to be “restored” fromgetting into the “worst case scenario”.. But the participants in the conference came up with serious
views, pointing out that the European economy is in a temporary lull while remaining under severe
conditions and that no optimism could be justified about future developments. Meanwhile, they
indicated expectations on a possible U.S. economic recovery and the Japanese economy featuring astock market upsurge and a shift to the yen’s depreciation under the so-called “Abenomics”,
economic policy of Prime Minister Shinzo Abe. But they pointed out that the future courses of theU.S. and Japanese economies are still uncertain and that a sense of risk still exists concerning theirsustainable economic recovery and their contributions to the world economy. Various problems werealso taken up in regard to recovery of emerging economies. Particularly, it wasnoted that China

could see a short-term slump in economic growth as its new government could switch from thetraditional growth-oriented economic policy to a new policy giving priority to a suitable balance
between society and economy and to qualitative economic development. A dominant view in theconference was that such world economic situation could lead to slow energy demand growth,
providing a key point for anticipating a supply-demand balance in the international energy market.
Next, the participants had heated discussions about the U.S. energy situation and policy
under the progressing “shale revolution”. At issue in the discussions were (1) how far the shalerevolution (expansion of unconventional oil and gas production) would go, (2) how the impact of the
shale revolution on the international energy market and the international situation should beinterpreted, and (3) what U.S. energy policy challenges would be under the progressing shale
revolution. On the first issue, some said the present brisk expansion of production would continue
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over a medium to long term with support from abundant resources as technological innovation
makes progress and spreads. But some others noted that no optimism could be warranted about theeconomics of shale development from the viewpoint of production costs and that a crude oil pricedecline could affect the economics of shale oil development. In connection with the third point to bediscussed below, some pointed out that a key issue would be how environmental problems would
affect future shale development.
On the second issue, some indicated that the shale revolution would further expand its
impact on the international energy situation as LNG exports increase after growing coal exports
affect the international market under the ongoing revolution. Many participants said LNG exports,
though depending on the issue of US government permission, might exert a great impact on thesupply-demand balance in the Asian LNG market, if a certain export volume were secured.
Regarding expanding shale oil production, some participants noted that the United States alreadyexports nearly 3 million barrels per day in petroleum products, and has become a major petroleum
product exporter competing with Russia and the Middle East. A factor behind this reality is that U.S.
oil refineries have benefitted from lower gas prices and improved their competitiveness. In this sense,
we may also have to pay attention to the impact the U.S. petrochemical industry, which also benefits
from lower gas prices, would exert on the global market.
On the third issue, participants discussed the impact that the ongoing progress toward U.S.
energy self-sufficiency would exert on U.S. foreign and energy policies and paid attention togrowing U.S. interests in environmental problems and policies. Pointing out that President Barack
Obama discussed the global warming issue in his inauguration speech for his second term and thathe might have given some consideration to environmental problems in selecting Secretary of DOSand Secretary of DOE, some participants called for paying attention to what policy or stance theUnited States would take on environmental problems while greenhouse gas emissions decline
substantially under the shale revolution. An interesting opinion given at the conference said that weshould take note of water pollution and GHG emission through shale development, environmental
problems linked to new pipeline construction including Keystone KL pipeline, and otherenvironmental challenges and constraints that exert direct effects on U.S. energy supply and demand.
Participants in the Vienna conference also made various interesting arguments about
international oil and gas/LNG markets. A key point regarding the oil market was how the present
trends such as progress in unconventional oil development, Iraq’s expansion of crude oil output, andslowing oil demand growth would affect the future supply-demand balance. Some participants notedthat the high costs for unconventional oil production would support oil prices, while some others
pointed out that the expanding shale oil output and the Iraqi crude oil production rise could becoupled with slumping oil demand to exert a very great impact on the market.
On the natural gas/LNG market, a dominant view was that the European gas market slump
is serious with no demand recovery expected for the immediate or mid-term future, while various
views were given on possible increases in North American and Asian demand. Some pointed out thatwhile Asian gas demand is likely to increase steadily due to a demand expansion linked to the2

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nuclear power generation problem and a shift to gas caused by local/regiona environmental problems(air pollution), Asian gas/LNG prices should grow more competitive for expanding Asian gas/LNG
demand further. There was an argument that the Asian LNG market could see an easing
supply-demand balance around 2020 as supply from such new sources as North America, Russia andEastern Africa expands faster than demand. Furthermore, some noted that Asian LNG buyers andgovernments are now embarking on unprecedented efforts to reform the Asian LNG pricing
mechanism under the expected supply and demand environment. Discussions also touched on othervarious issues including the significance of a more flexible, liquid Asian gas market including
gas/LNG hubs in Asia, institutional and policy measures for developing such market/hub, and very
complicated and toughnegotiations on the gas pricing problem in the real world as seen from

actual discussions between buyers and sellers. The Asian gas/LNG issue might have become one of
the key topics in global energy discussions.

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